Dive Brief:

• Walmart's third quarter revenue rose 2.5% year over year to $128 billion, the company reported Thursday. At Walmart, U.S. top-line sales jumped 3.2% to $83.2 billion, while comp sales rose 3.1% (including fuel) for the U.S. unit.
• E-commerce sales in the U.S. went through another large expansion, growing 41%. Sales growth was slower at Sam's Club, which posted a 0.7% increase in total sales and a 0.8% increase in comps (inclusing fuel).
• Operating income rose 6.1% at Walmart U.S. but fell 13.7% at Sam's and fell 46.2% in the retailer's international business, leading to an overall drop of 5.4% in operating income. Net income for the company nearly doubled, to $3.3 billion.

Dive Insight:

Once again, the largest growth number at Walmart was its e-commerce sales, with grocery serving as the major sales driver. 

The retail giant now offers pickup from roughly 3,100 locations and same-day grocery delivery from more than 1,400 stores. Services like in-home delivery and an “unlimited” delivery subscription have rolled out in recent months, with the aim of deepening customer loyalty as Amazon ramps up its grocery services, including a new grocery chain due next year and free Fresh service for Prime members.

Within grocery, product innovation and price investments are driving customer interest. The retailer noted snacks, beverages and fresh foods were top performers in Q3, while private label “increased penetration” and “continues to drive strong sales along with our expanding omnichannel offering.” Comp sales in grocery increased in the mid single digits, the company noted.

“Our strength is being driven by food," CEO Doug McMillon said in prepared comments.

However, while food has boosted online growth, McMillon added that Walmart needs to improve its general merchandise performance.​

"We're making progress on many fronts, but we need to do more and move faster, especially with our assortment including marketplace," he said. "I continue to challenge the team to drive a deeper, more sustainable relationship with the customer, better execute the fundamentals, and improve the overall economics of the business."

Charlie O'Shea of Moody's noted Walmart's e-commerce growth as well as a slight operating margin improvement in a "hotly-promotional environment," saying that the performance "speaks to the quality of Walmart's operating discipline, which will come in handy during what is shaping up to be yet another acutely-promotional holiday season."

GlobalData Managing Director Neil Saunders noted that Walmart "remains firmly on a top line growth trajectory" but also pointed to Walmart's reliance on grocery — a low-margin category — to boost its online sales, as well as the gradual erosion of operating margin at the retailer over the years. 

"Driving a greater volume of higher-margin general merchandise via e-commerce is critical to bolstering operating numbers," Saunders said in emailed comments. And while there's evidence this is happening, progress is slow so far as shoppers still see Walmart as a low-price leader and "many lucrative online shopper segments remain wedded to Amazon," Saunders added.

He also pointed to challenges on the horizon, including costs associated with the accelerating shipping arms race, price pressure from deep discounters, Amazon's "incursion into grocery" and continued tariffs as well as "Walmart's internal challenges as it tries to integrate online and stores and copes with various personnel changes."

Those changes include the departure of Greg Foran, who led Walmart U.S. through its turnaround. Bloomberg reported this week that Foran, according to some close to him, "had grown frustrated with the amount of time and money spent on things that didn't matter to him" such as the money thrown at the retail giant's tech incubator, Store No. 8. 

While such a reported "culture clash," as Bloomberg put it, around Walmart's digital business has remained behind the scenes, Walmart has taken public steps toward a strategy shift. During Q3, it sold off vintage-themed e-tailer ModCloth, acquired in 2017, and has over the past two years dramatically pulled back on marketing spending for Jet.com to focus on Walmart.com. Along with the reported interest in unloading its Jetblack concierge service, these are signs Walmart's initial strategy for courting higher-income online shoppers didn't pan out as planned.